Section 115BBH Virtual Digital Assets Taxation Scheme (Tax on Cryptocurrency)

Key Background: –

Ahead of Tuesday’s budget announcement, there was a lot of speculation about the incoming cryptocurrency regulation in India. The Reserve Bank of India, the country’s central bank, had reportedly been pushing for a complete ban on all cryptocurrency transactions. Despite these concerns, investments in digital assets had been rising steeply across the country. Last month, Binance -owned Indian exchange WazirX reported that yearly trading volume on its platform exceeded $43 billion in 2021, at a “1,735%” growth from 2020.

Due to the increase in the frequency and volume of transactions of Virtual Digital Assets, for the First Time, the provision for the taxation of virtual digital assets is introduced in Budget 2022, bringing Cryptocurrencies & Non-Fungible Tokens (NFTs) under a tax net.

Section 115 BBH has been inserted which provides taxation rules on income from Virtual Digital Assets.

Bare Act: –

Section 115 BBH

Where the total income of an assessee includes any income from the transfer of any virtual digital asset, the income-tax payable shall be the aggregate of––

(a) the amount of income-tax calculated on the income from transfer of such virtual digital asset at the rate of thirty per cent.; and

(b) the amount of income-tax with which the assessee would have been chargeable, had the total income of the assessee been reduced by the income referred to in clause (a).

(2) Notwithstanding anything contained in any other provision of this Act,––

(a) no deduction in respect of any expenditure (other than cost of acquisition) or allowance or set off of any loss shall be allowed to the assessee under any provision of this Act in computing the income referred to in clause (a) of sub-section (1); and

(b) no set off of loss from transfer of the virtual digital asset computed under clause (a) of sub-section (1) shall be allowed against income computed under any other provision of this Act to the assessee and such loss shall not be allowed to be carried forward to succeeding assessment years.

ANALYSIS: –

Definition- Virtual Digital Asset-

In the explanatory memorandum of the Finance Bill, the government stated, “To define the term “virtual digital asset”, a new clause (47A) is proposed to be inserted to section 2 of the Act. As per the proposed new clause, a virtual digital asset is proposed to mean any information or code or number or token (not being Indian currency or any foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value which is exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes and can be transferred, stored or traded electronically. Non fungible token and any other token of similar nature are included in the definition.”

TAXABILITY UNDER SECTION 115 BBH

Tax Rate and TDS

• Income generated from the transfer of any virtual assets will be taxed at 30%.
• 1% TDS will be deducted on such transfers.
• The tax on cryptocurrencies—unlike the U.S.—will be separate from taxes levied on capital gains from other investments like investment in stocks and funds.

Expenses allowed to be deducted from Sale Value

• No Deduction (Other than cost of acquisition) in respect of any expenditure shall be allowed under any provisions of the Act.

Set off and carry forward of losses

• No set-off and carry-forward of losses allowed to Virtual Digital Assets investors.

Taxability of Gift of Digital Asset

• Individuals who receive digital assets as gifts would also be taxed under the section 56(2)(x).

Conclusion: –

The steep tax rate and inability to offset losses against any other sources of income shows government intention to dissuade investment in the volatile assets instead of outright banning them.